St~ff Papt'r No. 53

THE ECONOMIC BENEFITS OF POTABLE WATER SUI'I'LY PROJECTS TO

HOUSEHOLDS IN DEVELOPING COUNTRIES

D~le \'o'hittingtOrl,.,

Vcnk~te5w~rlu S"'3m~

J~nu~ry 199~

Dep..1rtment of Envi ronmental Sciences &. Engineering

Univers ity of North Carolina at Ch~pt'l Hill

Adaptl'd from

a Staff Study Report

prepared under the supcrvi~ion of

U &1 Lay

Senior Economist

Economics and Developml'nt Resource Center

Asian Development IJ.1nk

"',... n ~1op"'CtU 8.>nk

1'.0. Box 7f!I!

IIJ99 Man,"

!'hillpp"""

C1J9II~ by ...... n o.,.....""v"""', s..n~ ).n"''')1 199.i ISSN 0l16-V3x

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Foreword

The Asian Development Bank Staff Paper ~ries presvelopment Resource Center

Abstract

In this report the authors argue that there is a need for both impro\'oo procedures and ootter practice in the estimation of the economic bcndits of water supply projects. The authors d iscuss the concept of "economic benefits" in the water supply sector, and then pres

Table of Contents

,L l~lrOOul""'~ 11", C"" ....~lucnn~ "I Wdl," / 1''''''''''1(\'''

b. 11",.hmd,, \',~"" ,,/ II"' ...... Torno.' d Pn"I'......ct \ktil 3() A Introducuon 10 Ind",..,t M.;nS' 11.>;..\1 on W~tc, ~ot PUf(h.>~ ,rom \'condors '2 2 (OSI 5o;!>''''1;' 11.>...' Vdluc of 11m Jncrc~5.'d Quannl\' (>/ \\~,~. L'~ 37

O. n..- H,.J.11l1C Prop"'" \',Jue Appro.1ch J'jI I InlroduCbOn 39 2. Th...'Of(t]C,,1 F""fTl

v. Practical Appro.1Chcs \0 ~tim.1Hng 11'1" EconomIC &nefilS

to Hou5'l

Lis t of Tables

\.1 2.1

~.2 ,I.]

:.2

~.I .'.2 b.t

C,,,,, ond Iknd,!. ,,' \\Ia',-.. Supply Sy"'-""': A Simpl~ Ct.".llie''',,,n 33 ~.2 A Huu""ho)d'i I\-,u,ngn",,' '0 r.y ior W.,('I' E;";m.:>',,,

ul [).)i[y Time So"inS' 35 ~ . 3 H)'IJOth"'i",IIn y....., Ho"""huld ~nd Function

fo, A"""""b,h'y to Pub!;( \'~I"" T,p H 5.1 F,t'qu

J. Int roduction

By good luck or poor oversight, depending on one's lX'rspectiv .... w~ter supply projects in developing coun tries h~ve b~n lnrgely sp~red from critic~ l examination by economists. Gener,llly spen king, neither donor ~gencics nor national governments look carefully ~t the economics of investments in urOOn or rur..1water supply projects. Water supply pro)ec1s nre rarely subjo..'Cted to the kind of rigorous l'COnomic analysis that is expected in mnny other sectors.

This lack of economic ~ppr;li$ll of waler projects h~s occurred for IWO basic TCJ500n5. First, in m~ny cases improl'ed water supplies are J I'ery high priority for communities. People do not need it explained 10 them by professionals th.1t, without water, they can only live for at most a few d~ys. Bolh govemnwnts and opposition parties 11.11'1' often responded to this gr~5Srools demnnd for improved waler by as'iCrting that (1) ac(css to water is a basic human right, and (2) it is the gon'rnment's responsibility to see that nil citizens are supplied with dean, sufficient supplies of water. This philosophy was an integrat p-1rt of the United NatiOlL~' Intemational Drinking Water Supply and Sanitation Dec .. dc in the 1980s; it lives on in the s logan of the 1990 New Delhi Consultntion on SMe Water and $..1nitillion: "some for all, rather than more fo r some."

The problem formula tion implicit in this I'iew is to minimize the costs of providing service to ;'Ill, subject to the oonslr;'llllt that everyone is served at some minimal lel'el. Bause the planning problem has been defined as a matter of m~ting hasic IIC'cds and providing "coverage" 10 uns.erved p(lpul~tions, there would seem to be 110 need to estimate the benefits of wilter supply projects, because they have implidtly been OlS,

,

low, and proj;.'Cts mllst be ju~tifi~d on other grounds. For ru ra l water supply projects the World B.mk a lmost ne\'(~r attt'lllpls 10 estimate cmnomic bl>nefilS but instead alludes to "unquantifiable" beneiils to justify projects. Simil,u!y, the United States Agency fOT intcrrkl lional D.:!velopment mi1k~ no effort 10 estima te the economic benefits of water supply inv('51ml'11t.s, nor does it have ilny guidelines or staodllrd procedures for the economIC apprais.ll of wil ter supply p roj;.'Cts. The In ter-American Development B..lnk (lDB) is the o nly mil jor rn ll ltila tcml donor th1l I regu la rly a ttempts to estima te the eCDllom;c benefits lL'Sulting from its water supply projt'cts (Powers 1978; Powers and Valencia 1980).

If the informal approaches to appfilis.l l o f \,'Jter supply projects thilt are currently in uS{' in most donor agencies were generally successful, th,m perhaps one could argue tha t there is littl~ to be gilined by ~U~r economi( ;mOllysis. Sadly, this is not the (asc. For 01 " i1 ridy of reilsons. m~ny ,,"at~r schemes do not to lh'e up to expl'Cl~lions. In urb.111 areas WilteT pro;"'Cts oft~n lail to achlo,ve the performance OInticip.,ted in terms of wa te r Silks, number of connedion~, and t h~ proportion of thl' costs rL'd ly "'served"' by neW water facilitit"$ hav .... chosen not to use theoe f~cilitit"$ ;"Ind have, instCild, continued to rely on tr"ditional sources.

Diffel\'nt disciplinl'S havl' uff"J"t..>rmine whether residential customers were willing 10 pay the ta riffs proposed for water supply improvements, cun"ul\ants for Ihe Ea~l JOIVOI Waler TOIriH Study (Knight ~nd Scott Consultants 1985) S\lrv~'Yo:d approximately 1.soo households in two large towns

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and eight villages in different parts of a World Bank project area in East Java. The proposed project Cilllcd for the oonstnl(:tion of piPf'd Willer systems with public taps throughout the rural are.1S of East Java. The results of the consultants' survey sho\\'~'(\. however, thai the demand for water from public ta ps was much less than antici p..1tlXl. Most of the rural households relied on skiUfu lly constructed Sn.1UOW wells for their dom

The wnsultants C(lnc1 uded that households would not usc a public [liP if it were more than 20 to 30 meters aw~y from th(' house. which was much dOSl'r than the design standard then in usc. In villages tha t al rl?lldy had pub1i(: laps in operation. the highest proportion 01 sample households found to be using the public taps W;lS only about 20 percent. The consultants concluded 1I'l.1t although water from the pilX>O systems with public taps would be hea vily subsidizL>O, it \',.;\S unlikely that mllny households would use the water from the "improved" w;ller systems, ;lnd that such rur(ll systems were not finM\c~' l!y viable.

INspitc thei r I;lCk of interest in public tolPS, molny people in the mToll pro~t areas expressed an interest in and were willing 10 pay for;) privilte connection. In one ;)r

,

TABLE!. I

Cosh and lI~ndlr, o f W~tu Suppl)" Systtms:

A Simple Cl~Slir.c~t;on Schcmt

Benefits of the Water ProjtCI t: Co.ls of Ih~ W~t.r Proj~ct .ro:

Low High

Low Ca,;c II High Ca~D

Investments ~re most desirable in Case B si tuations (high benefits, low costs). Most of these a re found in urban a reas; one does not find "'~ry many of these situations 1Il rural ~rc;"ls (Whittington and Choe 1992), If the costs of waler supply (Ire low and the benefits;lTE.' high, in many instances people will ol rcady hav(' solved th!";. waler problem. Where Case Usi tuations a re en{'1) Un lerLod. it often h~ppcns Ih," supply hils bL'(!f\ Mhficia lly const rained by rent-extracting agents (Love; .1nd Whittington 1993), in which case solu tions to the wilk. problem orc likdy to be more IXlitl("l lhll tl t"'chnical in character. In rapidly growing urb.ln areas, the benefits of re1i~ble. high-qua li ty water service can bot:! extremely high even in the absen~of T\'nt -Sl.'eking agents because the publi" water systems agenoes have typically been ur4,ble to keep up with increases in demand.

Case A slluations (low benefits, low costs) may occur in rural areas where tradilioml water supplies are plentiful ,1Ild where the opportunit)' cost of ti me spent collecting water is low. The benefits of impron>d water sU f-l plies may. indeed, be positi,'e in such si lu.,lions, but the net benefits ~re not likely to be gre.:lt. Investment in such areilS will prob~bly not yield the highest returns.

Case D situatlons (high benclrts. high costs) aT\' common in .,rid areas. Here the benefi ts art! high for two reasons. First, because w"ter is SCil r,"", household members must walk (or ride :mimals) long distarlCcs to collt'C1 wa ter, or lhey must pay Willer vendors high prices to do this job for them. The timl.' ami energy savings from an improv~>d water s)'stem neilr their home (or the cost 5

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C. Overview

It is our belief that there is an urgent nee

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may h;wl' plenty of li me ~vJi1(ause they value the con venience of a private tilP _ If the value tha i they p lat\! on the time and errorllhey spend hauling water from Ihe hand pump and w;liting in a queue is h igh, the rm! resou rce cost (or shadow price) o f wnlcr 10 themtaking a(eOll ot of Ihe value of their lime-fa lls as a result of the project. And bC!(;ause the shadow price of water to huuseholds fa lls. Ihe quant ity of IV"ter they consume goes up. '111is sets in motion a sequence of changes in hu man beh~vior and economic activities in th" communi ty.

For example, wo men no long"r ha w to ~p"nd time fetching water from the h'l!ldpump. This ti me may now be realloca ted to different activ ities, such as food prepa ration, "gricultura l work, child care, and leisure. (What such time savings would ac tually be u!">C'd for in i\ pil rt icu lar m mmuni ty is a n empirical (]uestion.l Moreover, the ready availabi lity of water from a low-cost p ipL'(l connectio n in the house may change personal hyg iene habi ts, promoting increased ba th ing and clothes washing. If household "'a t>!r use rist's signific~nt ly (as it a lmost always does when private connections are insta lled), the "real" "alul' of a housl'hold's totall'xpl'nditure on water, in terms of time, energy, and cash, may be gn:!atcr th,'n bfore, el-en though on a per u nitlxlsis water from the private connection is much kss expensiv" than wat>!r frum th~ hand pumps.

These changes may manifes t themselves in many WJys, resulting in still further chang"s in human activ ities. The mos t commonly expected collsequellce of water supply interventions is improved hl,man health. Incre~5ed water use for bathing, washing, a nd food p'""p,)ra tion CJ n often bc cxp~ct~d to 1cJ d to a rl'd uction i n 1'"

Some of the ch~nges th~t r~ult from the introduction of a piped di~lribution system may be Tt'flected in ch"ngl"i In Ihe pri", of other good~ Jnd ~rvires sold in the com munity; others mJY not For e~"mple, Ihe value of prop

Soml" of the chollll;l"i 111.1\ rel' wa~tE'S, ~Jc"rh.:lh l'g W3~to"WJ!l,r dl~IX'I",'1 problE'm~ Without o;.cwl'r,'g,' ~nd dl'nl\" I I ,s ,m fX'....slhlo.> to dl'tJ II nd d.,,~\f) themall

supply project would be high, even though people's money incomes remained unchanged Jl\d no jobs were CT~ated. This de fi nition of "economic benefits' has important impliUl tions for the appmisal of WJte r supply interventions_ First. it means that the most JPpropri~te measure {)f the va lue of the project's outputs is not the financial rdurru; due, for ex~mple, to impro\'ed lJbor productivity from better health, or the va lue of increased agricultur~ l income r~~u l ting from more labor i npul~ into agriculture. Rather, it is the household's incre..1sed uti lity Or well -being thJt r!'Suits from the w~ter supply improvement. If n household feels thM the b~-.,;t uS

,

These percen tages a re s imply hypothcti Cil l, but they do seTve to highlight the intcrfJcc

between two SQurres of confusion ~l1d dis.lgreemcnt: 0) the rela tive size of the health-nnd the non-health-related benefits, and (2) Ihe degree to which individuals accuratdy percdve Ihe benefits of water supply projects. The numbers in Table 2.1 would obviously \'ary depending on the specific projl.-ct being app raised. liowe\'eT, l"vl"n for the Silffie project, water sector professiol\ills' prior e)(pect.llions aboutlhe rn

TABLE 2.1

rerY Ihere w~s another communIty that already had in operJtion ,11' improved waleT system slnltl.lr 10 11"'1 pro)X'Sed for the first commullIly. Bo:>forc Ih is WJter system wa~ built, hou"i.Chold~ In this sectl!1d commumty were, by all appearance;., very SIll1;1,1r III culll""I, T\!hgIOllS, .1nd -.ociocconomic ch.1r,lClcrisI!CS to hou

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c. Households' Preferences for 'ConspiCUl)US Consumption"

Some households in ~ community may dl'Sire n helllS/' connl'd.ion (rather Ih.1n, SOIy, access to a public t..lp) for ' prestige r('"sons; or to impress their neighbor< with their ability \0 pay for such a modem convenience. Water resource planners aTe often inclined to ignore such preferences for a higher level of serv ice th.:m the gener.l! population (

On the other hand, in some places households Me willing to pay an cxtr~ordinarily high p.:;rcent~ge of their income for improved water service. In the Newala District of T.~nzania, households are extremely poor ~nd spend several hours ~ day colleeling wnter during the dry season. TIley an~ willing to pay about 8 percent of their meager income for access 10 water from public taps located in their village (Whittington, MujwlIhuzi, McMahon, and Choe 1989). In Ukunda, Kenya, a snmll market town south of Mombas.1, the majority of households ilre already spending mOre than 10 percent of their income purchasing water from wat.:;r v~ndors (Whittington, i..llHiil, Okun. and Mil 1989). Fass (1988) found that during times of drought the poor in Port au Pri nc~, Haili somi'limes pay more th~n 20 percent of their income to w"ter vendors. Similar results have been fo\,nd in Sudan (Cairnerus:; and Kinnear undat...'

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of the new service (or public good) without paying lls "{ni r shHe: The b.1sic difficul ty is simply t h~t if one household ta~ Qn action that benefits other households and is not rewarded for it, then this household is unlikely to do enough of this action (or do it often enough).

Forexample,an individu.1\ household would prob.:lbly obtain some health-related benefit.'! from using an improved water supply, even if other households in the mmmurnl)' did not. 1lowever. if all members of the community engaged in a collective dcdsion to use the improved water 50\,rCe, then all might obl .. in an added benefit from a fur ther reduction in the inddcnco.' of w;l ter-r('1ated diseases. In this case II posi tive .. )(tt'rnality would exist if

(1) a household's dtrision to use an improved water supply resulled in IImlth improvements for its members, 3nd, as 3 result, they did not spread infectious dised i11 project a ppra is.,I. But just because the externnl ities associ .. too with potable wilter supply projects are extremely difficult to measure. it should not be assumed th.,t they are i1lways large. This is particularly true when households do not perceive such benefits. In this Cilse households may nol use the improved water supply system and potential positive externalities m.lY not materialize.

Often attempts to justify potable water supply projects on the basis of lorge, unquantified positive extemolities are rather bhlt~nt attempts by project analysts to avoid careful scrutiny of the actual CO tlSequences of an intervention in the wa ter supply sector. Unless defensible est imates of externalit i

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benefits in cell B may 1M.> mdudf.'d In our eshmates of l'COnomlC ben~(jIS [0 the e).tenl tl1.., 1 lin individual household fet'ls an obligation or comnlltmcnt to the good of the );reiller communlty.ln otheT words. III o rder \0 receive the hcnch ts 11\ '11 B, th" hnus\'hold may red a T(,'ciprocal obligation to provide such benefits to 0111.. "

In theory a hou!>f!hold nngh! attempt to fret' nde If II wlsh!d 10 avoid paymg for th ... use of an improved ",,,ler ~ul'ply systl'm, and shl! ....-1 ~I....d 10 rereive th .. bend'\" in cell without making any p.lymCllt In p.,,(tice we d o nol belle\"\:,' thilt thlS IS ,11> unport:mt oonC('nl because households 11~'''V of ....,"" to u'"' ~ '''''' ,..,"< mWI ,~a" ...~ ...~..... ule /'" """"""""I

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able for life, eQuid be {rcc, whereas di,lmoncts. which men and women eQuid e~5ily do wi thout, were so expensive. This ridd1" was solved by Iloting the distinction between the tota l u ti lity obtaine

for nn ndditional unit of waler.' The vertical a~is n1l1y also be ust'd to ]l1easur~ the sh~dow priet:!, or rea l resource cost to Ihe indiv idual

will only take this opportunity cost inlo oonsider~lion if it is reflected in the w~ter utility's pricing policy or if the property rights to the waler a re cleMI y assigned to ag ricultural users.

The demand cur"" for water can be thought of JS d ividing the price/quantity plane into Iwo regions (Figure 3.2). Suppose an i ndividu~ l is C01l.~um ing quant ity Q,. The value to this individua l of a very sm~ll increase in the quant ity of wa ter supplied is P" If the real cost to Ihis individual of this inC"reas.e in wa ter supply were les5 than PL, the ind ividua l would be wil ling to obtain (purchas.e) the additional wa ter. For example. the individual would be happy to pay P,. Any point below PLis thus feasible; PLis the most the individual would be wi ll ing 10 pay per unit for the additional w~ter. If the real cost to the individual was g reater tl1.1n P" the individual would choose nol to h ..we this additional water. 111e region aoove tl"" demand curve is thus infeasible in Ihe sense tha t the individual is not willing to incur such costs (or pay this price).

It is useful to th ink aoout wh~ t determines the shape of the individual's demand curve for water. The individua l' s demand curve for wakr can bl' disaggregated into demand curves for differ~nt uses. For eXilmple. consid~r the ind i vidua I's different demand curv~'S for water fo r dr inking and cooking, bathing and cloth.;s washing. and irrigation for vegetable cultivation (Figure 33a).lf th\.' shadow pri c~ of water is high (Soly, PL1, Ihe ind ividual would only u~e a small alllount of water (Q,), all for drinking and cooking. If the shadow price of water fa ll s to P" more water will be used for drinking and cooking (Q,), and water would al50 tw used for b.~thing and washing (QJ). If the shadow priet' of water falls below P" the indLvidual will bL'gin to U5~ w,l ter for gMden irrigMion.

The individual's aggregate demand curve for waler is the horizonta l summation of tlwse three demand curvl'S for spt'cific "",,ter uses (Figure 3.3bJ. For example, the individual' s total wa ter use at P, would be QL ... Q, .;. Q) (though Q, ,,"o\Lld be zero at P,). Be(ause th\: mary, in" l value of water to the indiv idua l is dependent upon its va lue in different uses, and because the marginal values lor these separate u~es may be very different, it is extremely unlikely that the ho ri zontal summation of the ind ividual's demand functions for d ifferent wil ter uses will resu lt in a lineM aggregate demand curve for water (ladle, 1990). As shown in Figure 3.3b, one would expect tha t an individual"s aggrega te demand function for water would be convex with respect to the origin, indicating thaI the lllMginal va lue of water does not decline at ,1 uniform rate as waler use increJ~'S. When water uS

FIGURE 3.3

A Typical Jndi~id,.. l"s (Hou"",IIold's) W.t~r D~m.nd Cu .....~

" " ! , ,i

i , " "[ , " ,l

, Q' (Q:I."WI

,.. '" ,..

s."""", Todl

3.4). I [e is then provided ....ater at a lo ....er sh..1do.... price P,; as a result, he uses an increa5ed quantity Q,. His toLlI .... illingness to pay for the original quantity Q, \\'as the area A + B + D. I-Ie had to pay B + D for Q,; Ihus his net benefit associated \\';th the use of Q, at a sh..1dow price P, (that is, his consumer surplus) was aIl'a A. [n fact, area t\ would be infinite if there were no other options availnble to Ihe individual, because it would then include Ihe benefits associated with the amount of water necessary 10 sustain life.

FIGURE 3.4

An Individu,\'s IHouSthOld's) Willingness to P~y for W~ter

A p,

Sh.adow Price of B Waler

P2

D E Demand Curve

a 0, 02 Quantiry of Water

The individual's totill willingness to pay for the quantity Q: is the aIl'a A ... 8 ... C + D + E (the area under the demand curve from :lcro to Q,). At price P, he has to pay D ... E; his net benefit is thus A ... 8 + C. Comparing Ihe situation at price P, to that at price Pl , we see that the difference in the individual's net benefits from the two cases is A + 8 + C minus A. Thus as a result of the fall in the shadow price of waler from P, to P, the indh'idual's net benefits increase by Ihe area B + C. (Note th.,1 it is not ne

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C. The Individual's WiUingness to Pay for Water: Incorporating Source Choice

This st;mdard paradigm for concepluahzinr, the e

- -

FIGURE 3_5 An Individu.l's (Household',) \\,.t.. Dem.nd Cu,v.s for W. t. r from Open Wells

-_. ,

, ' 0, " , , , , , , , ,,1 0

" " 0 . 0' ....., , ,, "_ ....., n,,,

FIGURE 36

, ,

0

,,.

t ZC

live ~ t diffe rent dist,mces from the open wells a nd public t.aps, and because the opportuni ty cost of the time s~nt colk'Cling w~ter will be different for different households, the r~i11 r~OllTCl' oosts of using the o~n wells Jnd public taps will vary across households . Let \15 as.~ume that the 10t,,1 rcsourC(,> COSt of obtaining wat"I,I, an.' ""~"k' "n,t

"

where P "", P,;, and P". represent the shadow prices of wa l ~r from the three sources, and Q"", Q"" and Q,~ the quantity of water used for drinking and cooking above the assumed per capita survival cOfl5umptiol1 qU.llltity of 5 Hters. (Th(' three demand ~uations for drinking water are only meilningful for strictly positive v"lues of shadow prices and waler use.)

Bel;"ause the first 51iteTS of wall'l" consumption aTe required for survival, let us assume tha t the tot"l utili ty i1ssociated with thiS qunnl;!y of water is cquill for the thrcc sources; it is not considcroxl in the analysiS. TIle intercept temlS in the three demand equations dl'Picl the margin:! ) uti lity (or shadow price) to the individua l of a unit of wa ter beyond that 5 liters. The individual would thus be willing to P" Y 5 un its (me.lsured in money terms) to get an additiOlkllliter of walt'r from the wells; 7 unils for an additional liter from Ihe t.lps; and 10 for a Hter from a \'endor. The coefficients indicating the slo(>($ of the demand curves show the r.ltes at wruch the indi\'idu~I's willingness to pay (VYT'P) d('Cl"('.1S{'5 for ,-,,'eh unit of w~ter use beyond the quantlly assuml'l neccss.~ry for survival. 'll,ese drinking ~nd cook.ing waler d~mand I'

,

FIGURE J,s

An IndividuAl'. (Household's) 1V.!.r Sourc" C h oice and W.lcr Usc D~dJlons (Op" " lI'"nsl

" ~c ' ()

Qw '." Q- .1", ~.-

C. "f . ..,

FIGURE 3.9 An Ind ividu.ll"S (llnus.ho ld sl \V.ller Sour- '

.::: 0 1"" OZO ' OIOIa

'0 'D T---- ----, I

,

, " !:f~:::-::-;-;:_J La

-

,

l-'-..'::::"S~-~J

Q ,.. , Q. '>c.

' . D.o.", ,," ~. "...,.. ~"" C. T. .. ,

,

FIGUR E II

An Individual'S (~Iouschold '$) Consumer Surplus from the

Introduction of ripcd W.tcr Distribution Sys t~m

" ,----------;" ,--.---------,

, ~. "''',

The household would adopt ~ similar procedure for selecting a wOller source fo r its o ther water uses (in our (ase, w"shing). for example, aSSllllle thilt lhe household's average member's demand l'quations for water for washing lITe given by:

P_;.2-{1/20IQ... (3-1l p... = 2.5 - 0/20) Q... (3-5) P_:3-(I/20)Q..... (3-6)

where P_ P.., ilnd p.. arc Ihe shadow prices and Q.....' Q_ and Q"" arc th.:: qu~ntities of water use for washing associa ted with open wells. public laps, and 'l'Ildo~, respectively.

These d('t1land equations suggest that the household h.1S a higher m;lrginal ",rrP for vended wil ter til.1n for water from other sources and th.1t Ihe rate of de introduction of Ihe piped system might or might not erl.1ble Ihe household to incrrose its consumer surplu~ from different ""~ter uses. If the new water project does offer our (l, tl!itY-l1Iaximizing) household more consumer surplus than its exist ing consumer surplus for ~ p~rticula r wJ ler uS(', it would 5c1~t the piped water syst('m for tha t water ust'. Assume that Ihe water demnnd equations for drinking and washing from a piped system for e;l(h individual in the household (Ire given by

PJ'I =- 10 - 0.5 Q,oI (3-n 1',.... = S - (1/20) Q,.... (3-8)

where P,.. and P",. represent the shadow prices, Q,., represents the quantity of water used for drinkmg and cookmg in addItIon to the Sliters assumed to be Tequired fo r survival, and Q,.. is the wa ter used from the piped s)'st,;,m for washing and bathing. Figure 3.11 iIlustrJtes these demand equations.

Assume the shildow pnCl' of pIped w~ter 15 3. At this pnce, If the hou$

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where U,.,

?rob Il~ = Il = ?rob [(V~ -+ 'oJ 2 (V~ -+ t ..)] r. 1 E I (3-H)

In other words. the probability tha t household h wlll choose water SO\l rce j equals thl! probability tl ...,t the utility derive

The distnbution of U, will depend on the distnbulian of the error lenn, and different assumptions about the distnbUllon of the- error tenn will Ie-ad to dlffcre-nt mathem;,tical specifications of the discrete choice model. A common assumption is that the error term fol1ow5 a Gumbel distribu tion WIth a me.111 e(l.'l

where Prob (;) is the probabi lity thM tho:! household chooses WJter source j (Ben-Akiva and Lerman 1985). TIlis multinomial logit model has been widely used to model household decisions with d iscrete choices (Amemiya 1981).

The independent vJriables in the indirect utility function include two groups: (I ) att ribu tes o f an altemative, which VMy across soura'S, and (2) sociolX"

Step I. Calcul~te the inverse of the standard nonnal cumulative density funcho n evaluated at p~ the prob,1bili ty th.lt ~ household selects source j. obtllned from the disd applic.ltion in some industri.llized countries for modellllg household consumption decisions In other sectors, but Ihe full model has ne\'t'r been applied to the problem of modeling household water demand behilvior in developing countnes. There are numerous rei!sons for this. First, th" model and the eshmation procedure are still rela tively ne",', and many apphed economists are not f~mi1iar with,\. Second, the fi('ld work required to collect the micro-level da ta n"cess.,ry to estima te the d isc:retll'-continuous model is diffirult, and secondary da ta ar" never available. Such pnmary data collection is alway~ h.1 rd and time-consuming, but sevefill problems make it espeoally so 111 thIS C'a5e To estimate the model, one must find a situation in wruch there is sigrufiC'anl vaniltion in both Ihl! independent and dependent ,'ar1ablcs. [n many places wilter-sourc:e decisions are not thilt complicated' e"eryone in II p.uticular location or part of the city chooses the same water source. Even in pl~ces where SOllle households usc one source and oth"r households use 11 different source, the users may ill rc.1lity nol h.we a choice. For example. some hOUSt.-'holds m~y be connected to a waler distribution system. but others thai are not connected may I\Ot have Ihe choice to connect bt.'C.1U.se the water utility will not allow any more connections. In some 10000tions water sources may disolppear in the dry 5('a5On, and tlulS limit households' source choire.

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In other places there may not be significant variation across households in Ihe shadow

price of w~ter. Variations in the shadow price of waler sometimes arise because households live different distances from traditional sources and thus must sJX."'d different amounts of time and energy collecting water. In many places. however, there is little difference in Ihc distance households walk for waler. In rural areas this situation typically ari~ in locations where everyone must walk far from the village to collect water (and all thus walk essentially the s.1mo: distance) or in places where wa ter is p llmtiful and no one has 10 walk very far. In both C.1SCS it is impossible to use the discrete-continuous model to estimate how households will respond to a change in the shadow price of waler, becau:;.c Ihere is no variation in this independent vJriable. (It often h~ppens, however, tha t when people must walk long distances for water, water-vending enterprises will emerge to sene higher income families.)

Fin.ll1y, micro-level data on the quantities of water households use (or different purposes are very difficult to obtain through household interviews. Direct questions about the amounts of water used for diffell!llt purpos"5 often t1"Ceive unreli.,ble answers, bec,m.se respondents are gener..Uy unable to "5timate quantities of wilter accurately. AI50, one household member may not kno,,' how much water other filmily members use. Direct observation of hou.sehold Willer use is e~lremf;'ly time-ronsuming and is gcner.JUy not a practiCilI alternative. Data on water sourre-choice decisions are much more readily ,"I\"ailable than data on quantities of water used for different purposes. Rainwater colt..>clion and seasonal variations in water usc complicate dMa collection efforts.

For all these rcasons, colk>cting the dllla n(.'Cessary to estimate the discrete-continuous model of wa ter-demand behavio r should be consideroo a major pha5-l' of thl'! research process, nOI as something th~t C.111 be done during the course of nonn"l project appra iSilI efforts. TIle primary value of the discrete-continuous model for practitioners lies in the conceptual fri1mework that it provides for thinking about household water demand beh.wior, and, in particular, its focus on the two interrelated decisions a household must make: what water source to use, and how much water to use from the sour' .selected for a p.lrticular purpose. Futurc research using the discrete-continuous model may yield insights into how households make the$e decisions.

Jv. Practical Approaches to Estimating the Economic Benefits to

Households: Revealed Prderence Methods

A. In troduction to Indirect Methods

Before deciding what type of improved water system to construct and promote in a community, planners would obviously like to know whether people will use such a system after it is built if different prices are charged. Ali fin,mcial considerations become more important 10 governments, user charges in the fonn of connection fees and monthly tariffs orten must be increased. It thus becomes important for water resource planners to have detailed information on how specific groups of households will respond to different prices and connection charg"5.

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But how can Ilnyone rea lly kllQW befor~hand wh~th~r households will connect to a waler dist ri bution li n~ (or use a public tap) once it is installed? There are several W"yS to answer this question. One can experiment: a water line can be installed in selected areas, and one can observe how prople TeSpond to a given set of prices. Although this appro.lch theQretically can provide relatively definitive answers, it has several practical disadvantages. First. such an eXjX'rimenttakes a long time to carry Ollt; this generillly makes it impractic.:l! as a means of providing infomlation for a spedfi(' irwestment dedsion. Second, it is eXjX'nsive to 'experiment" wi th something as costly as the construction of a water supply and distribution project. Third. in such an experiment it is difficu lt to vary the prices and f~ charged for service. An experiment may show how households will respond to a single set of prices and charges, but planners typirnlly want to know what would h.lppen if the price of water service were raised or lowered.

To avoid problems like these, economists hilve traditionally used a second ilpproach to estimate the demand for a good or So;!rvice. They Iry to find a situation (or many different si tuations) where people h,we been offered the oppor tunity to buy tlwt good or service at different prices. With the aid of I.'

for the households th.1t chose to use the impn"'cd water source. In practi ct!, the data necessary to estimate this model are almost never available, in large part because they are extremely diffirult to collect. (This is p.1rticularly true for dilta on the amounts of wa ter used in various household activities.) Other indirect techniques are thus required to develop reasonable estimates of eronomic lx!nefits (or project appraisal. Severnl such techniques aTE' described ~low.

B. Estimates of Cost Savings

The simplest and easiest portion of economic lx!nefi ts to measure is the cost savings to households from the improved water source. These cost savings may be in terms of the time people will save as a result of nol having to fetch water, the money they will no longer h;lVe to spend buying water from ,'endors, the resoUI"C('S they will no longer have to s~nd to improve the quality of the wilter, the food they will no longer have to buy becauSt"' they are using fewer Cillories as a result of not having to fetch water, or some combination of these. The calculation essentially entails five steps:

I. Determining the shadow price (or real resource cosl) of a unil of water to households before the project is constructed (P E);

2. Determining the shadow price of water to households after the project is constructed (P,l;

3. Estimating the quantity of water households are using before the new waler system is built (Q,);

4. Estimating the number of households in the community that will use the new system;

5. Calculating the cost s.wings pcr houschold by multiplying the difference in the shadow price of water lx!(ore and after the project (P, - P,l by QI; and then multiplying the number of households that will use the new system by the net lx!nefits per household to obt.l;n an estim~te of the tolal cost .5OIvings.

Note that to estimate the cost s,wings, one does 1101 nero 10 know the quantity of water that households will use after the new wnter system is constructed (Q,).

1. Cost Savings Based on Water Not Purchased from Vendors

Let us now consider how the cost s

Now suppose tha t J new wilter supply system is constructed in this community Jnd that households h~\'e the option of connecting to the sys tem and having a private metered connection. Assume tha t the price of w;lter from a private connection is US$O.SO pl'r cubic meter (P, in Figure 4.1). If the household connects, its dai ly expenditure for Q, 000 liters of water) wi ll be US$O.OS, representing J cost savings associated with the initial quantity of water used of US$OA5 per day (Jrea B in Figure 4.1).

This estimJ te of the cost s.1Vings is only a portion of the total benefits to the household: it docs not include the consumer surplus the household receives on the quantity of water it may use in addition to Q, (area C in Figure 4.1) . Nevertheless, this estimate of the cost s.wings alone is still nine times greater than the revenues the watl'r utility will receive from this household for the sale of Q,.

RGURE 4.1 A Heu~"etd's Wit\i"g".ss te I'~y fer 1V.,ter:

Estimates of lJ~ily Cu" S.vings .nd Consu mer Surp tus

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l > , , " , ~ ,

}~ " ~2 ,,

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..l-L- __'-'---_ 0' . ,,,,

Qu>ll';ty of W"

To develop an i1ggregale estimale of Ihe cost Solvings for an entire community, the only additional informalion necessary is the number of householdscurrenlly using waler I'cndors who would connect 10 Ih(' pirro syslem. If Ihe prosp

into a Iypical demand curve in which price is expressed in monetJry units_ For example, suppose the hourly wilge for unskilled labor in the community is US5(1.25, and that the household valw.'s the time it spends fetching waler alone-half this wage rale. A time-price of 16,7 hour~ per cubic meter of wMer would then lJcled. 3nd (3) the monetary v3 lue of time spent fetChing wateT. The fiTst two ilems Call be roughly estimated (rom ro:spon.ses to questions in " household sur"ey, but respondents may not be able to estimate the time spent collecting ",Mer "ery accurately. Nor is it easy to estimJte the quantity of water collected if waler is c~rried in containers of many

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differomt sizes. The best approach is usually to observe households collecting wa ter ~ l the source, to get an estimate of queue hmes and the qu,'nlitil'5 of water collected, and to walk with women from several households to theIr water source and rock, to get an estimate of the time spent per trip.

It is generally not feasIble to undertake a rigorous a""lytlCal study of the value hOllSl'holds assi!;n to the t11ne they spend fetching w"ter. TI,e only prachcal appro..lch may \>c to ils~!m,,' a v"lue for the time s.,vings .:md then carry out a sensItivity analysis to 5ft! how that J~~l1mpt ion ,,/feets the est i mates of econom ic benefIts. For ,-",ampie. '" the past the I nt"rAmerican Developm("nt a,nk has "ssumed in its proceduft."S for appr.1ising "'.:lter projects that the ""lue of time spent collecting W.:lter ~hould be valued at onehalf the w,'gc r"te for unskilled labor III the ptoJect area (just as we did above). TheTl' has. however. been little em pinea I su pport for this assumptIOn. R~cenl e"idencl' suggests that til(' va luI' of tlllle ~p"nt fdehin!; water can be surpnsmgly high (Whalington, Mu, and Roche 1990), t\ study of a ~mall m"rk"t town in Keny" found that Ihe ,alue household~ assi"n tu the lime spent fe lchm!: ",al("r was appro~lma tely NJual to the full m,,,t-..ct wage r,lte for unskilled labor. (I n such a situiltlOn on(' would ("~peet w.,t.:-r ,"('ndUlg to flourish.,,~ w,,~ indecd the GISI' III thilt l(1wn.)

In m""y agncultur,ll communlt,

For example. a calculation for boiling wa ter might require that the ~nalyst estimate both the time required to boil water and the amount of firewood used to boil a liter of water, and assign a value to each. The value of the w ood could be baS(..,j on the va lue of time household members spend co llect ing it , or on its market I'alue-or el'en the marke t value of the wood plus the value of the time spent hauling it home from the mnrk C'l.

Esti mates of these I'arious types of cost s.lI'ings need not be mutually exclusil'e. !t is certainly possible that the ~Oll resource cost of water to the household will include both the time spent fetching wilter and the 'illue of the time and resoun;:e5 spent boilillS it. Estimiltes of the totill cost sa,,ings should be based on the real resource cost per unit of water hefoT!' the projl"Cl.

C. Estimates of the Consumer Surplus on the Increased Quantity of Water Used

The second portion of the benefits of a n impro\t.'(\ water supply i~ the oonSll!ller surplus on the increased quantity of water used lIS a rt$\I !t of the fall in the sll.1dow price of water. If the relevant dcm;l1ld function(s) for water were known. it would be a straightforward exercise to calculate this consumer surplus associated with the increased supply of " 'ater (Q, - Q,)_ Problems arise. however. beWe recommend il third nl'PTO;lch: one C,m ,1ssume a functioJ),11 form fo r the water demand r.;:1,ltionship (e.g., IineM or log-linear). Mid estimate the quantity of water that is likely 10 be consumed (Q2) allhe price to be ch~ r!;l'{t (P,I. Given the two points (/'" Q,I Jnd (1'" Q), and the assumption of n functional form, the demand function can be defint'd over the relevant range of va lues of Q" ilnel the COllS\ll1\~r surplus C;ln be determined. The first slep ls 10 calculate the cost S

The advantage of this procedure is that it conveniently relates the m~gnitude of the consumer surplus to thi:' cost savings. For exJmple, consider aga in our first eXJmple above (chilpter IV, p 32), where P, " USSS.OO per cubic meter; P, " US$O.SO per cubic meter; and Q, ,,20 liters per capita per day. If we assume that households will consume approximately 100 liters per capita per day after the pipi:'d wati:'r systt'm is installed (and P, " US$O.50), then for iI log-linear demand I\tllction. the consumer surplus would be about 0.8 times as large as the (ost savings (Le., the c-factor" 0.8). Since the cost s..wings is US$O.45 per day, the consumer surplus is approximately US$O.36 per day.

This procedure enables the project analyst eas ily to separate the estimate of cost savings from the e~timate of consumer surplus. This is useful because in many cases cost $owings will appmr to be more reliable and less speculative estimates of benefits than estimates of consumer surplus. Decision makers will often prefer to keep these two components of project benefits separate. If the project can be justified on the basis of cost $owings a lone, estimat

log-linear form be used to calcula te the c-factor unless the analyst has good reason to believe that the linmr or exponentia l form is more appropriate for a particular project site.

St il l. the analyst should be.1r in mind that ~IJ three of these functional forms are at best crude representations of household water demand behavior. TIle fundamental underlying probkm with the a ttempt to find a funct ional form for the traditiona l water demand model is that the household's choice set is considembly more complex than ~ continuous sing leequat ion demand model implies. As discussed in Chapter m. as the price of water ch~nges. the individua l houschold may change botll water sources and water uses. The estimates of consumer surplus obtained from this c-factor proce

Maximize U(Q, :;", z,. z, . ... xw."" zoo) (4-1 ) subject to /iQ + r(z", 2,. z, ..., z~,",,' .. z.J = Y ( 4-2)

whel12 p = price of the composite m~rkel good; ,(Z) is the hedonic price function that rel.ltes the market price (or rental vn lue)

of the housing unit 10 its attributes; and Y = household income.

The household is ~ssumed to spend ,,11 its income on the purchase of its housing and

connection bec.1US

assume that the accessibility of the housing urnt to the pubhc t"p (3n be me3sured by the distance {OJ from the housing umt to the public tilP (in meters). Suppose tfl.1t the monthly rent31 price (R) of eilch housing unil in the sample is ,1 function of two housing ~ ttribut\.'s: the numbn of Sxpect Ihe monthly rent of the housing unIt to be lower th(' f.ut her 3way from the public I ilp it is, other thIngs being equal For purpose:; of illustration, we assume that the hedonic pnC\' equation [unchon IS log-Ime

Continuou< ,s. Di5cr~" tndeFnden' V.ri.,b l~,

Trp' of !nd.pendM' VUi.lb l. in 'he Hedonic Prie. Equ.tion l:unction.1 Form of 'h" Hedo ni c Prie. Equation Con lin uous Variable

Linear , 0 ,

Semi-log

TABLE 4,2 HypOlh~licaJ D.la S~t for Eslimating tke lnv~rse D~m.nd Fundion for

Accn.lbility Using th~ H~donlc Pro~rty V. lur Appro.,k

Uo"...,ko ld Monthly Renl Dis tancr 10 Public Tap Ho"",hold In

The welfarl! change that a household {with a given incomel ob t;> ins from reducing the distance of its housing un it to the public tap can be c~lcu l~ted by integrating this inverse demand function for accessibility over the relevant range of distance to the public tap. For example, in Figure 43, the economic benefit to a household with a monthly income of USS 80 of rcdudng the distance of its housing unit to the public tap from 500 meters to 300 meters is given by the area A (which is approximately USS20 per month).

4. A Pmct;cal Approach for Discrete Housing Att ributl!s

The SC('Qnd st!!P of the hedollic property v(llue model is most relcvant when the analyst is concerned with measuring thl' I'COnomic benefits as.soa.1 ted with changl'S in a continuous variable describing a housing attribu te. When thl' impro\'ed water service GIn be characterized as a categoncal (dummy) variable (i.e., a household either has a connection to a pipt.'cl system or it dOl'S nol), Ihere is a simple, practical apprL>.1ch for approximating Ihe economic benefits differenl grO\lps of households derive frOlll a priva te connection. firs t, the analyst sep

rarely Jv~ilJble' Tllere are very few studies that h.we applied the hedonic property v~lue model to the problem of estimating household demand for improved water services in developing countries Oirnencl 1982; Follain and Jimenez 1985; Quigley 1980; Jnd North and Griffin, 1993),

nlere or ",he< publi,h ,,"ould be. -prinllry" da.. roll"",,,,n h.",hn;qllO

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the value of the improved Wiltl.'T services per 51;! bul also the incre"sed tenure securi ty that results from the provision of service.

It is important to note two charactC'ristics of the measures of eronomic benefits obtained from the hedonic property value mod!.'\. First, iI household may P"Y a n..'Il1 premium (or higher purchase price) to live;n (I housing unit with ~ private connection but it must still pay the month tariff" The margina! willingness-to-pay estimates from the hl'Oonic nppro.lch thus measure the benefits to the household i'l ndditioll to the ';!riff, The 10\(1) monthly economic benefits to a household would be the estimate of willingness to pay from the hedonic approach plus its expenditures to the water utility. The analyst must thus be careful when comparing estimates of eo::onomic benefits from hedonic property value and contingent valuation approaches.

Second. the hedonic property v~lue tlpprwch can be used to obtain estimates of the economic benefits of a private connection, but it cannot help an.llysts understand how changes in the price of waler will affect the quantity of water a household USi'S. [n other words, it does not yield a demand function for water. It is thus of limited usefulness in the design of tarilfs. Nevertheless. in some situations hedonic propet'ty value models may offer a promising altcTII~tive to eslim~ting househotds willingness to p

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improved system; yet the availa\>le md,rect methods do not offer a simple, pr~ctica \ wily 01 l'Stimll ting how m~ny households will. in fact, do so. For this we must turn to the (ontmgl'nt valuation method, In Chapter V.

V. Practica l Approaches to Estim ating the Economic Ikncfils to

Households: Direct Methods (Contingent Valuation Surveys)

A. Introduction to DiI1'C1 Methods

The oontingenl v.l\ua t ion method (CVM) offers ,1 dir..'d. IIltUI\"'cly appc.,ling means of l'~t i1lla t lng the \.'COnomic benefits of ,111 improved wa ter '\lpply. R.lther than ,ltll'mpti l't; [0,) infer from bch.1Yiornll11fonnation how much an lI,d,\'I\lU,11 is willmg to I\'Y Illr impruv .'d :..,rvicl', one simply asks outnght how much the indiVidual or household would bc willing 10 P.1y. 'l1\i5 appl"03ch has several 1m porl.lnt ad,'Jntilges over mdin.'CI methods. Fil"il, II (",In be used to v.llue So;'rvices tholt .lre impossible to a6S with indillX1 'lpproochcs. Fur 1!)(:Imple, It c..ln be used to evalu,lte the benefits of mcre,l~ reli,lbllity of eu"ting w,]t~r systems, or the reaction of households to priU'S or lL'

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B. Designing Willingness-to-PilY (WTP) Questions

Contingent valuation sUJ"\'cys are typically based on either of two types of Wll' questions. (l) Respondents may be itskoo a direct, open-ended question such 3S: 'What is the maximum ilmount of money you ",()uld be willing to P"Y (for iI specified good or s!!rvicc)?" Or (2) respondents are presented wilh a sJX'cific choice which requin..'$ a yeslno ;lllSWer: for example, "Suppose a willer distribution line werc installed in front of your house. Assume the connection fcc WilS x (in local currency), and that the monthly tariff (perhaps fora given volume of water) waSlJ. Would you choose to connect to the new waler d istribu tion system?"

Either of these two question formMs can be used to develop estimates of households' willingness to P"Y for improved waler s.ervices. But the two formats yield two different tyP"S of data. Responses to dired Two Qul'Sthms Option 3: A singkl Yes/No qUl'Slioll, r"uo ....ed by J

d,,'\. opcn..., n(k'd question Option 4 : T ....o Y~/NO qu('Stioos

Respondent Is Asl:ed Three Questions Option 5: Two Yt'5/No

Option 2 is to ~sk a single yes/no question of each respondent, but to vary the price offered across respondents. In olhN words, some respondents would be asked whether Ihey would choose the improved waler service if the tariff were alone leveL and other responden ts would be asked the Silme question but for different levels. For example, if the s.' mple size were! 500 households, 50 r.lndOlnly selected respondents might be asked whether they would choose the service if Ihe price were U5$I, another group of 50 would ~ asked whether they would choose the service if the price were USS2, and so on up to US$IO. All of the 500 respondents would Ihus receive one yes/no question with a price somewhere between US$l and U5S10. This is known as the -referendu m method." (Note that in the ex~ mple of Option 2 shown above, only one variable is a llowed to change; thus, questions thill specify both the tariff (y in our sample question above) and the connection fee (x) must leave one or the olher of these variilbles constan!.)

The analysis of the kind of data obtained from Option 2 requires that iln I'COnometric model be eslimnled which explains Ihe respondents' yes/no answers as a function of a series of indeptmdent variables, including the price at which each Il'Spondent was offered the service. 11lis "referendum" model can be l'St imated with probit or logit techniques, and has bt.'Cn used to derive estimates of households' willingness to p..'y for improved water service (see McConnell 1990; Cameron 1988; Briscoe et al. 1990).

Options 3 and 4 both invo"e asking the respondent two \'iJ"P questions. Oplion J is a oombin..ltion of Options 1 and 2. Each respondent is asked a single yes/no price question, and the specified prices are varied across SUDs,lmplcs of respondents just as described above. After the respondent answers Ihe yes/no question, he (or she) is then a~ked a follow-up, direct question regarding Ihe maximum the household ....ould be wilting to p"y for the service. Option 3 has an important advantage ovt>f either Option 1 or Option 2: it yietds two distinct sets of data on respondents' willingness 10 pay for improved water services, each of which can be amlyzed to develop cstimntes of households' WTP. Sino.! the foll ow-up, open-ended question is asked second, there is no risk tlmt asking it will innuence the answer to the yeslno question. Responses to the yes/no question can be nnaiy

However, it is a lways importan t to consider whether the initia l price o ffen:d influences rOCS (Xlndents' answers. With Option 4 one can "My the "stnrt ing point" (x, the initia l price offered respondents) by setting the fi rst question at a high price fo r one group of randomly Seil'Ctl>d respondents and a low price for another group. This creates a problem: now the four categories defi ned by the two yes/no responses are not the same fo r the two g roups. Hence, answers from res(Xlndents who received a high starting point cannot be easily compared with ans wers from those who received a low st~rting point. For this reason Option 4 is genera lly a poor way to structure the WTP questions.

However, there is a way to modify Option 4 to tl"St whether n:spondcnts' answers are infl uenc ...>d by the sequence of ljuestions asked. This modi fied version requi res two groups ' Grou p I, respondents who rL'C('ivc fI low starting value; and Group 2, respondents who receive fI high starting value. For buth groups the quest ion format has two steps:

Group 1: Low Starting Value Step 1: Ask the low stnrt ing value. If the answer is no, stop; if yes, go to Step 2. Step 2: Ask th", high start ing value (the in itial price for group 2);

wha tever the answer, stop.

Group 2: High Sta rti ng Va lue Stcp I: Ask the high stnrting va lue; if the answer is no, go to Step 2; if yes, stop. Step 2: Ask the low value (the i ni t i~1 value for group I); whatever the answer, stop.

The result of this question fonnat is that some Tl.-'Spondents Jnswer one yes/no questinn MId othe rs answer two. If L and H denot~ the low and high starting values, each respondent 's WTP bid wil! fall in to one of three categories: (1) WTP < L; (2) L < Wll' < 1/; and (3) H < WTP. llecau&C! these categories re the Silme for both groups, the responses can be easily con' pared. 'Illis modified version of Option 4 is thus pn:ferred to th~ "UlUllodified" version bec~use it permits statistical testing to see whe ther the WTP bids of the two groups are different. Because there ~ re thT

As with Option 3, there is little cost associated .... ith asking Ihe follo .... up qu your exi~ting waler sources?

y", - Con"....:1 .................... Go to (6)

No Con""u" using "xi5~ng ~urces . ___ .. Go to (7)

(6) If the monthly fee w~s US$3, would you want \0 be mnncclcd to thl- wat,-, distribution ~ySlcm, or would you prdcr 10 ronl inw using your "xisling wa ter 5Qul'Cl."S?

Yl'5' Conne

indicates that respondents ' at1-~wers to late r questions in a bidding g~me are condit ion~d on the st~rting value ~nd the responses given to each previous question (this effect may also be present in Options 4 and 5). TItus, mony an~ly5ts have concluded thai li ll l", additional information is obtain(,(! by r~pid ly ask ing such yes/no quest ions' Most researchers and practitioners working w ilh the contingent valuat ion method in industria lized countries have abandoned the use of the bidding game question format. Almost no one advoca tes asking more ththm" ond th u. perhap' ro",iOQf th~ir rc

dt'Signer Intended. This is not a "bias" int rod \'a>d by the T\.'$pondent, but an error introduced by the survey designer. It results from miscommunica tion: the respcmdent provides an answer to a question th

Literature on the contingent valuation method has propooscd numerous other vari.1tions In the SurvL'Y instrument to test the accuracy and rt'liability of WTP bids. The following are examples:

:I. Variiltions in the elicitillion procedure (that is, the way the W11' questions are asked). 5

Testing for accuracy and reliability of WTP responses through such experimental design procedur~'S ca n thus be quite tricky and requires considerable eMe in survey design. It is often a much more subjectiv" proC\.'SS th.1n many analysts would like to admit. For example, ~e\'ernl "arly studies in the contingent valuation literature introduced vMiations in the method. of payment for the goO

3. Comparison of Results of Contingent Valuation Surveys

and Indirect Benefit Analysis

For many economists the most compelling evidence of the accuracy of WTP bids from a contingent valuation survey is how closely they dovetai l with benefit measures obtained from indirect valuation methods, such as the hedonic property va lue method described previously in Chapter IV. If time and resources permit, such (omp

Cont ingent valuation info rmation can be used in two basic ways to pt'rform this three-step 5"'luence without the use of econometric techniques. The first ;lpproach uses WTP bids both (I) to p redict the number of housi!ll()lds that would use the improved wa ter source. and (2) to estima!" the "conomie b

II is not nccessmy to know how the respondent's household intends to use the water from the new source, or the quanlity of water to be used. For CXJmplc, one respondent mJY offer a W'JT' bid for i1C~es$ to a $ystem of public taps in a village and yet hJve no in tention of using this willer for washing, whereas ~nother m~y offer a similJr bid ~nticipating tha t his household would use such water for all household needs. In both ca~ the bid offers

Total mo"thly onomic benefits of the system _ Sum of the bcnciits of those households assumed to ron" .,.,'

" (40 x US$3) + (20 ~ US-SI) + (10 ~ U5$5) - U5.S250 P"" monlh.

At an actunl fee of US$3, these 70 households must pny the water utili ty US$210 per month. Their net economic benefits are thus US$40 per month.

FIGURE 5.1 Frrquency Distribution 0/ MJ~imum lViIlingness-lo-l'.y Bids.

ror 3 Pri.... te IV~IN Connedion

8 uss po< '''''''''' "~

0 _

] o , , ., ~ ; , -Z

,

FlGURE 5.2 Monthly Fr~ ror a Walor COnnrdion vso f"urnbc. of Households

Conn~~ting 10 rlV.d Wlter Syst~m

'.-~~-----

, .; 8' h,"- ,~ , ;, ! 1,I

~

.l------,,--___=::,,.

Mootl,]y f" for . "'''or

2. Approach 2: Using WTP Bids to Estimate Usage of an In1proved

Source and C-Fnctors to Est imate the Benefits to a Household

This second approach uses WTP bids only to estimate the n umbd to a new p iped water system. This approach is most uS

Suppose that in our hypothetica l community of tOO households eo,h is asked its maximum willingness to pay for a cubic meter of water from ,1 metered connection to a new piped distribution system. The frequency dist ribution of their responses is given in Figure 5.3,ond following the procedure described above for the first approJch, one can ca leul" te the nu mber of p iped connections demand ed at a lternative prices (Figure SA). Su ppose that the water uti lity sets the price of water at USS1.50 per cubic meter. According to Figure 5.4, 75 households would then conn~ct to the distribu tion system .

We may now ll5e the C f,Ktor procedure described in Chapt~r IV to estimate the economic benefits to a hous.ehold that connects to the water dist ribution system. Suppose that the analyst knows that each indiv idual in the average household of five is presently buying 20 liters peT capita (Q,) from a vendor at a price of $5 per a cubic meter (P,): that is, total household consumption is 100 liters per day, or 0.1 cubic meter, for USS050. TIle an~lyst estimates that the nwmbers of the average household will use 100 liters pr capita (Q,) illhe household conne.:ts to the piped w;lter system J nd the water u tility charges US$1 per cubic meter (P,) : thai ts, total110llsehold consumption wilt ris .. to .500 lil~TS pt'T day, ur 0.5 cubic meter, for the Soln"" total expend i ture of USSO.50 per d~y. The analyst assumes that the household's water demand function will be log-linear.

For these values for 1',. Q,. 1',. and Q,. the Cofactor for th.:' log-linear functional fonn is I . This means that the consumer s u rplus on the household's increased water consu mption is equal to its cost s~vings on the original quantity of water l'sect. The household 's cost Sowings ~nd consumer surplus on the increased consumption CM\ be calculated as follows:

Cost savings = (1'1 - Pl) x Q, = (5 - I) x (0.02 cubic meters per c~pita per d ay) = USSO.Oil per capita per day, or = U&,

"

FlCURE S.J

Fr"'luoncy Distribu llon of WilJjngntsstop~y Did. for Pri,".to, M~lu.d \~'.tc. Conn~cl ion

Wiil,"S'."" '" P')' fot ~."" (US$ r '" mlXI illm )

FlGURE 5 4

J'rice of Wot. r V$. Num ber of Uousohold .

C"nn.~ling to Plpo r! W~ler Sys tem

, "' ,---~---,

! 1 ,a

! ,i ! ~

'~.------------:-----------~,----------",:,

I'r",< of w"" from popcd .,. 'cm (US$ p.. [000 h",n)

http:Pri,".to

"

Consumer surplus '" c x Cost s.1vings

,,1 ltO.08 " $ 0.08 per ('"Jpita JX'T day :: US$O.40 per household peT day.

The household"s net economic benefit from having the connection and purchasing Q, units of wate r a t price P, is l'

mll i n t! n~nce e:d. The tim! profile of costs and beroefils and the net present value calculation are shown in Table 6.1.

TABL6,1 Time I'",me of Cost. and n ~,,~ fit .

Period 0 l'erind 1

tk,,

during period 1 but move there sometime late>r in t h~ planning period (Group C), If /l', '" benefits to households in Group i in period t. then the annual benefi ts in period t are the sum of the benefits to households in each group in that period: B, '" B~, + B", + BC, .

1. Households Living in the Community and Whl) Connect

to the Water System in Period 1 (Group A)

COfL~ider first an individual (household) in Group A and its water demand curves depicted in Figure 6.1;1-d. If the n

, '" I'gjpd 2,

" " '---+--+"-',;"'"" C

, Annual h""",hold henl~il,.re "bt.i",'

65

Now suppose that {rom period 1 to period 2 the individual's income is forecast to incr~"se (agil ln , for reasons independent of the provision of the improved water system). This resulls in a rightw~rd shirt in the dem~nd curv !.! (from D, to D, in Figul\.'S 6. 1 C lind d). If the improved water system is riot built Ihe individual' s water use would incrcilsc fTOm Q1 to Q,' (Figure 6.1c)-;\ssumillg the quanti ty of waler supplied from traditional sources can be increased by a modest amounl. If the improv~'(! water system is built, the individu(t as forecast. '111e literature on the income el.~slidly of demand for w,ller from pipctl systems in developing countries is again very limited, but a valu\! of 0.4 appe.lrs reasonable (Katzn1an 1977, Hubbell 1977, and Meraz 1968). In other words, if the individual's income increased by 10 percent from period 1 to period 2, his water use would increase by about 4 percent.

The ned step is to use the I'alues of P" PI' Q,'. ~nd Q,' to calculate the Cofactor for period 2 from the relevant equation in Appendix 1. ThIs requires an explicit assumption regnrding the functional form of the demand curl'e. (Note that the cofactor in period 2 is not the SM"IICllS in period I.) The co fa ctor am then be used to estimate the COJ1SUlller surplus on the incre~scd quantity of water used in period 2 (QI'_ Q,') for ~ household in Group A. To obtain an estimate of the benefits to all households in Group A in period 2, the analyst simply needs to multiply this l>fr /louse/wId amount by the numw of households expected to be in Group A.

In pr,lctice the analyst ",m not have enough information to justify m~king such calculations for every year of the pl'lnning period. Instead, we suggest t11.1t this procedure be used \0 estimate the annual benefits to houscholds in Group A at the end of the planning period (and perh.lps one or two other periods in between period 1 and the last periodl-and then Interpolate between these two amounts to obtain approximations of annual benefits for each year of the planning period.

To illustrate the calculation, suppose Lhat before th(' installa tion of a new water system, an individual was buying 20 liters per day (Q,) from I'endors a\ a price of USS2 per cubic meter (P,). After obtaining II private connection to the new system, we assume that the mdividual would use 130 liters per day (Q,), p

would be U5$O.075 peT day, and the annual benefits to the household (assuming 65 prople per household) would be about USSI80.

No.... SUpp05e that we ilssume a 2o-yea r planning horizon and expect real incomes to double over this period. Assume that the income elasticity of demand is 0..1. This would imply that Q1' would increase from 130 liters to 182 liters by the end of the planning period (assuming the r(,JI price of water from the system remJins constant) . Suppose that liS a 'Suit of il doubling of income Q,' would hnve increaSl..>d to 30 liters per capita per dilY. In this case both the cost s" vings and the COl\Sumer surpl us would be about US$O.05. TI,e benefits to the individual in p('riod 20 would be US$O.1O per day, and the annual benefits to the huusehold in period 21) would be about U55237. In this example we would suggest that a reasonable estimilte of th(' time profile of benefits to 11 household in Group A would be to start at USSISO in period I and increase Ihe bencofits by USS3 per year over the planning period (Le., 8, '" [SO, B: :: 183, BJ '" 156, ... ).

Another reilson that the annual benefits occurring to households in Group A may change over time is that they might leave the community. If they are property owners, they may then rlXCive il portion of the capitalized value of the water services in increased value of Iheir prop~rty. If they ;Ire renters or if the \'alo

"

If forl!(;asts of changes in income, education. or other soci~onomic variables are available, then these fOreCilsl Vlllues can be inserted into the above equation and values of households' willingness to pay in future time periods can be cteriv(d. TIle predicted WTP bids of households in Group B would presumably be Lower than those of households that connected immediately. However, as the incomes of Croup B households rise, the model would indicille how much their willingncS~H(}-pay bids would irl(~'se. The an.l1ysl can then make

It is possible, however, that the higher purchase or rental prices m~y have captured much of the household's consumer surplus ~SSQci~ted with the improved water services.

In this ca&e the net (remaining) benefits of the improved water services to some of the Group C households may be quite sm~ll, The value of the time st ream of services provided by the water system is effectively captu red by existing property owners in higher property values , To the extent that the prderences of Group C households for improved water services are similar, much of their consumer surplus may be captu red by existing property owners in h igher prices (and rents), If there an' substantial d ifferences between households in Group C reg"rding thei r preferences for improv!X! water se rvices, then some of the Group C households may still obta in some consumer smplus over and above the value the property and housing markets attribute to the improvoo waler services. in general. one would expect urban land and housing markets to capitali~" at t.;ast some of the benefits of infraSl ructure services such as water. Similarly, it is quite common in the water ~'Ctor for projects to be financed by gran ts or subsidized credi ts, and thus one would not expect the costs of the project to be capita li z~d in property va lues .

On the other h.1nd, if the benefits of water services ,1re not capitalized in renta l and property values, then they can be fully ~ppropr i~ted by new residents. This migh t be the case, for exompk in a si tuation where sufficient excess copacity was built into the water system to provide for new residents, and the government distributed vacant land at a fi xed price to in-migra nts (or squatters simply took vacant I~nd). In this (",15e the benefits to new residents can be estimated just as for Grou p A or Group B houS

As a result of the system expansion, the water utility's marginal cost curve shifls to the right (Me, in Figure 6.2). Group D households can now purchase ~llthe water they want at price P" and they buy Q,. In this case it would be a simple matter to colcutate the benefits to Group D households from the project.' These benefits woutd simply be Ih" consumer surplus on the increased water consumption (Q, - Q,) (are~ B in Figure 6.2).

FIGURE 6.2 Welfare Eff~cts 01 a System Cap.,eity Expansion

Price

A

D

Quantity

However, this is almost never an accurJle description of the wa ter supply situation facing such Group D households. because thl' water utility, in fact, Cilnnot deliver watl'r in such a way that only the highest value uses by Group D households are supplied. Water is typically ra tioned not by price, but by low pressure and supply interruptions. Becau5-e waler systems in need of expansion in developing countries arc typically plagued with reliability and distribution problems, Group D households do not actually receive a consumer surplus equal to area A in Figure 6.2 .

We ',"urn" )""" 0"" in figure 6.1lh.:lllh pri~ of ",Ole, fmm the o ld and ne'" diwibut Km systoms is lhe ""m~.

Households often respond to unreliable supplies in either or both of two ways. First, households purchase or construct slorage fllcilities SO that they rnn (01lec;t water wh"n the system is in operation in order to have water for use when the system is down. Second, households may install their own suction pumps to draw water out of the distribution system, thus lowering the pressure for others.

One of the main benefits of system cJpacity cxp.lnsion and rehabilitation projC' few hou rs per day; they were asked how much they would be willing to pay per month for improved reliability. Thdr n..'Sponsc.s suggest that on avcrnge they would be willing to pay more tha n double t he cur rent \,1 ri II i f r~linbiJi t y were improved. A Iso, some households thnt chose not to connect to th(' unreliable system would connect if rclinbility were improv.xl.

If the timo.! and resources are not available to carry out such a contingent valuation study, another alternative is to estimate the nmount of time and money sll

"

Vli. Summary and Conclusions

In this paper .....e ha"e argued that potable wall'r supply projects need to be subjected 10 mOTe rigorous economic analysis IMn is commonly required by most donor agencies. At its most fundamental level. economic analysis is important because it helps identify those projects that people want ~nd for which they are willing to pay. Improved economic apprais..ll of water ~upply projects will resu lt in bettcr (l1I01:.' I;on of invd the theoretic~l basis for benefit estimn\ion in the water supply sector. We noted 1h.""1t in the standard paradigm there are two components of the economic benefits an individual receives from the im;tilllation of an improved supply: (1) Ihe monetary cost of resource savings associated with the quantity of water used prior to Ihe instill1ation of Ihe new system, and (2) the consumer surplus associated with the increased qU;1ntity of water u5lXl. We argued, however, thnt this standard p.1 radigm is incomplete b...'cnu~ it fails to adequntely address the problem of wilter 501Irce chOlet. TIlOmic value.

Second. we outHnL'd a simple procedure for developing estimates of the consumer surplus on the increJsed quantity of water used as a result of the fall of the shadow price (or real resource cost) of using water. We recommcncl simply assuming a functional form for the WOller demand function and estimating the quantity of water that is likely to be consumed at the price that is expected to be charged. Based on this information and knowledge of the current water usc and shadow price, the demand function can be defincrl alld the consumer surplus easily dctermint'CI. In Appendix 1 we have provided the equations neccsMry to carry ou t these calculations.

In Chapter IV we also described another revealed preference appr"'l..:h to estimnting benefits: the hedonic property value model. Using this indirect method. an ana lyst can infer the value households place on improved water ser"ices from the decisions they m

n

property \'.1]UI' model will not IX! ~pplic.)bll', we belie"!' Ih,,] this inctin.'Ct :lpprooch has considerable promise in developing (Ount ri l.'S. This is bcGluse housing markds in many dcvcloplllg reunifies are beroming less subject to restrictions such as rent controls., and bccauSo:! it is fairly easy to carry out 11 household survey to colk'Ct the d:l]:l necessary 10 estimate the model.

In C]l.'pter V we provided (In overview of the contingent valuation method ~nd discussed how it can be used to l'Sti!llate the economic ben('fits of waler supply proj~'ds. TIle contingent " .. Iuation method can be llsed in two different wnys to develop an estim(l lc of economic ~n('fils. j:irsl, the answers respOlldcnts give to some kinds of contingent valuation questions are direct measures of e

Group C households nol living in Ihl' community when Ihe water project is inst~lled, but move in during the planning period ilnd dL'Cide to uS{' the new system.

The e""luation of the Sffond situation requires the same information on these three groups, as well {IS information concerning ont' more group:

Gnmp 0 - households h"ing in il community and who ~111'i1dy h.we" connection to Ihe existing water system (or use iln existing system of public tips or h.lndpumps).

The main difference between estimating the benefits for Groups A, B, and C is simply the lime per iod in which Ihey begin 10 receive the benefitS of the improved wa ter system. We show in Chapter VI Ut.,t additional issues arise in CSl.imating the benefits to households in Group D, ilnd suggesl trot the cont ingent valuation method be used to estimate the benefits of increased reliabili ty and increased quantity of water to thcse households. If the time and resources are not available to carry out a contingent valuation study, we recommend tha t the alt.llyst approximate the benefits to Group D households by cstimating the time and money they are spending to deal with the reliabi lity problem.

In conclusion, we believe that there is a clear need fo r both improved procedures and better practice in the estimation of the economic benefits of water supply projects. The selection of the appropriate benefit estimation approoch to use in a given situation will depend on the time and budget constraints of the ana lyst doing the economic amtysiS. However, all of the recommended approaches discussed in this papt'r rC!quire at least some primary data collection at the household level. Household water demand behavior is 5U fficien tly complex, ilnd existing data on household wllter use a re so l im it ~xI tha t it is ra rely adviS

APPENDIX 1

Estimating the Consumer Surplus on Increased Water Use:

The Use of C-Factors

A, Derivation of C-factors for 111ree Dema nd Functions

Figu"" A I shows a hypothelical wdler dt'mand funcli

IIl .... u!'O.' It is a relari,cly easy ""'th." to calculate the cost s.>vings. it is po:ssibl;, \0 l"$rimate the consumer s"'plus On the in(T"'~,;cd quantity of wat'" u5l'd or>C\ tho.>

Note Ihal Ihis "

3. Power (Los-linNr) demand hmction : In Q = In Q - to In P . or Q = a p '

Consumer surplus = ocndils acrn ,; ng 10 a household dill' to pric

APPENDIX 2

Guide to Estimating the Benefits of Potable Water Supply Projects

This ~ppcndi... summarizes the approaches TeCOmTlll'l\ded in this P"P"'" w dl!Vl'Iop better esblNlt('S of thoc economic benclits of po"'hle watl'r supply proje>:ts to houSf'h.olds in "">'....,w water syst("m when il is in ' arc rcqulr~>d to

"

at a sp' of household. indkaung that they would ro"",-",\ to (or uSlh. aroi wc" l ",,,,,,-'l-. and the dl'ci~"" 3' '" wll,cll '0 u"., '" " p.""""I,,, c;,s.. Is ~ n~'"~r fur pr~Ic..;~ior,,~1 lud!;mt,m.lU! not only thc' numh'-'r "f 1j(,,,,,-'I,,,I,h Ih," w,II",lcm ," a ~p.."..,fioo 1'00:, and thus m.~y noll."ow tl>;, "t.",-," v;1 luc

Tho.> ~",~Iyst C~n the.... U ,mp 1(..n.J ~'N' ~J'PfOO(1) 1 015..." 2) V~I",-... of P, m;lv boIl.'Shm.lte.l by tho.- projec, 311.llyst on IIIC basi. of co.l 1SI s.wings 10 oola", an C'>llmate 01 I"" consu""" ~rplus.

An ad v,l" "'S'" of this c-Iactm app~1> i~ that it con'''-'''K'fllly rebteS the m;t.gnitude 01 the consun"" ' '''piu< t(l t..... ros.t savmgs. y,eld,ng ~'P'''''''' cs"mates of e.l(1). The "naiyst should gcnc,ally h ...p !I>~'S analvh..-~I modd~ u~vdop

80

time pro file or cronomic ho:ncfilS Fr' "(I!m',oId has bct>n dC"cloPlxl for h".c and ~upply i"t~"\lplions. 1le bt-"Tlcfit5 l

Rcfcrence5

AII:lI. M.I\ .. H. Jamal. J.L Uu. V.K. Sm'th ~nd D. Whit1>nglO.... 09'11). "Prire!; and Corm.'Ction Dpmt'l'l' l)eop"1J1'Ol'1'11. The World a..nk. 199L

AI~,'. M.A . B. Jamal. anJ O. 1\'hmm&!On (l99~). :"jll,nS""" 10 rQ.~ pr 1\'01" 1M /

Lc\>, KS, anfidcndcs in Ni!;~"a : Prh'a le Altem.tiv(.'l; and Policy Options." INU Report No. 5ctmcnt TI,~ World Bank. Washington D.C. July. 59 P.~gl"5.

Lc\>, L.F. (1979). - Identification and Estim.,tion in lIi1'l3'Y Choice Models w,th Limillod (Ccn50nod) Depcndctll Van3bk."s: n"wnwlnca, VoU7, pp. 977-996

Lee. L.I'. (1983). "Ccn..'uli:'d Eronomctri( Mod" Provlsioo of MUnicipal Watl" Supply: A Study 01 Jak3rta. Indonesia: WaitT &.o"rt:..,: ~rdI. 5pc1,,, in [ro,,.-,,nrlnQl. Cambridge UIliwrsiTy Pr 11\ CosHkndlt An.llysis: Rdl

Silmudson, P. (J9~7). ro.md-"Iivn' of uOl1omic A"al.'#is. H~"'Md Ulliv~'Tsity PR.,;" C,mbridgc, Mass. Samuel")n, P. (1954) , 'The Pure Th,'ory of Publk E:;, Vol . 29, No.7, July. pp. 1931 1942.

Tadle, A. (l990). "ho nomic Evaluation of Water I'roj

World B.lnk (1992). W.ter 3nd S"nit.tion Proj